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Abercrombie & Fitch's Dividend Is Safe

These three tools can help determine the stability of its payout.

As a dividend investor, it pays to follow how much of a company's money goes toward funding its dividend. A nice yield now won't matter much if the company can't keep making those payments going forward.

Here, we'll highlight a given company and its closest competitors to see just how safe their dividends are, with a little help from three crucial tools:

The interest coverage ratio, or earnings before interest and taxes, divided by interest expense. The interest coverage ratio measures a company's ability to pay the interest on its debt. An interest coverage ratio less than 1.5 is questionable; a number less than one means that the company is not bringing in enough money to cover its interest expenses.

The EPS payout ratio, or dividends per share divided by earnings per share. The EPS payout ratio measures the percentage of earnings that go toward paying the dividend. A ratio greater than 80% is worrisome.

The FCF payout ratio, or dividends per share divided by free cash flow per share. Earnings alone don't always paint a complete picture of a business's health. The FCF payout ratio measures the percent of free cash flow devoted toward paying the dividend. Again, a ratio greater 80% could be a red flag.

Each of these ratios reflect dividends paid in the trailing twelve months while yields are the expected forward yield. Let's examine Abercrombie & Fitch(NYSE: ANF) and three of its peers.

Company

Yield

Interest Coverage

EPS Payout Ratio

FCF Payout Ratio

Abercrombie & Fitch

1.1%

41.7

33.9%

22.6%

American Eagle Outfitters(NYSE: AEO)

3.5%

NA

55.6%

39.2%

Gap(NYSE: GPS)

2.5%

314.7

22.5%

24.8%

Hot Topic(NYSE: HOTT)

3.8%

NA

(90.3%)

121.6%

Source: Capital IQ, a division of Standard & Poor's.

With an interest coverage of 41.7, Abercrombie & Fitch covers every $1 in interest expenses with nearly $42 in operating earnings. Given its EPS payout ratio and FCF payout ratio are below 35%, you shouldn't have to worry that Abercrombie & Fitch will need to cut its dividend anytime soon. The company's dividend is safe, but our investor community is decidedly bearish on the stock.

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Author

Dan Dzombak has written for The Motley Fool since 2008. He covers value investing, investing process, and success among other things. You can follow him on Facebook or Twitter by clicking the buttons below or head over to his blog at http://www.DanDzombak.com